A Bulletin of Socialist Economic Analysis published by Ken Livingstone
Articles may be freely republished from Socialist Economic Bulletin provided the source is acknowledged

Friday, 26 June 2015

Wages, profits & investment In Greece

By Michael Burke

The IMF has placed a road-block in the way of a deal with the Greek
government and it remains unclear whether any agreement can be reached. The
prior agreement which the IMF rejected was itself already very onerous. But the
IMF wants to shift the burden of paying for the crisis away from taxes on
business and the better-paid towards more cuts in social protection. This is an
insupportable burden as net median household incomes are already below €8,000 a
year. Many multi-member households without work subsist solely on state and
public sector pensions.

The IMF argues that taxes on business will hamper growth, as business profits
are needed to fund investment. This argument is an important one and should be
addressed. It can be demonstrated that it is false argument. In demonstrating
that, it is also possible to identify a way out of the crisis.
In general, in a commodity producing economy profits are the decisive factor
in determining the rate of growth. In a capitalist economy it is the profits of
the private sector which predominantly fund the accumulation of productive
capital via investment.

But if profits alone were sufficient, then there would no crisis at all in
Greece. Greece has the highest profit share (profits as a proportion of national
income) in the whole of the OECD. The Greek profit share was 52.4% in the most
recent data. This is substantially greater than many other countries in the OECD
and as a consequence the labour share of national income is also the lowest in
the OECD.

Table 1 below shows the profit share and the wage share in selected OECD
countries. In effect, the IMF prescription is that those who are least able to
pay should bear the burden of the crisis.

Source: OECD, based on Gross Operating Surplus &Compensation of
Employees as a proportion of GDP, data for Q1 2015. Does not sum to 100% because
taxes on production omitted

It should be noted that the crisis countries of the EU in general have the
higher levels of profit share but Greece leads the pack. The trends in Greek
profits and wages are shown in Fig. 1 below.

Fig.1 Greek profits and wages

There are already ample funds in Greece for productive investment in the form
of the profit share of the business sector. The crucial point- and the driving
force behind both the structural and cyclical crises of the Greek economy- is
that Greek businesses are not investing, but are hoarding capital instead.

Providing businesses with a shield against austerity while cutting social
protection will not provide the investment needed. This is because Greek
businesses are unwilling to invest. The level of profits in Greece and the level
of investment (Gross Fixed Capital Formation, GFCF) are shown in Fig.2 below, as
well as the gap between the two.

Fig.2 Greek Profits and GFCF

In the most recent full year the nominal level of Greek profits was €95bn
while the level of GFCF for the whole economy (including government and
households) was just under €21bn. It is this level of uninvested profits which
is the main cause of the crisis in Greece.

Table 2 below compares the profit share and the rate of investment. Using
OECD data it is also possible to show what proportion of that investment is
actually made by the business sector itself.
Table 2 Profit Share, Investment Share & Uninvested Profits Share of
National income

In Selected OECD Economies

Source: OECD, * Most recent year 2013 or 2014

There are of course many other calls on the Gross Operating Surplus other
than investment, such as taxes and social contributions, but in the case of
Greece all these taken together amount to no more than 5.8% of national income.
The net savings of the business sector are far larger, at 9.2% of national
income, along with another 2.9% distributed to shareholders.

In a certain sense the situation in Greece is just an extreme case of the
general trend in the Western economies, where the profit share has been rising
and yet the investment share has been falling. It is the extremely high level of
uninvested profits which is the cause of the crisis. There is nothing to prevent
the business sector investing all of its profits and more, via borrowing. This
frequently occurs in economies where growth is strong. But in the OECD as a
whole the business sector is hoarding capital. Greece is an extreme case because
this has been the case over decades, and deteriorated further during the crisis.

These savings are not being held in Greek banks, which is a factor
contributing to their precarious state. Bank
of Greece data show that deposits by Greek firms fell by €8bn (equivalent to
4.5% of GDP) in the year to April 2015 even though both profits and savings were
substantial. This amounts to looting the country; extremely high rates of
exploitation combined with minimal investment and spiriting away the resulting
savings and shareholder dividends to overseas banks.

It is precisely these idle resources of the business sector, especially the
Greek oligarchs which should be tapped. This is not simply to shield workers and
the poor from further austerity, as important as that is. But these idle
resources could be deployed to fund an investment-led recovery that would
regenerate the economy. It is precisely taxes and levies on the business sector
which are required, and perhaps stronger measures such as nationalisation, in
order to tap these resources. They are also the measures that provoke the fierce
hostility of the international institutions led by the IMF.

The argument that this will curb the investment of the business sector does
not stand up. Despite claiming 52.4% of national income the business sector’s
investment is equivalent to just 4.4%. The bulk of investment in the Greek
economy comes from households, mainly on house building and repair. Business
investment is just a fraction of the level of uninvested and profits and
savings. This remains the source of the Greek crisis, which cannot be resolved
without state-led investment.